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San Francisco Updates Its Coverage Mandate

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San Francisco may have reduced the ability of employers in the city to use health reimbursement arrangements (HRAs) to comply with the city’s Health Care Security Ordinance, which requires most employers in the city to help pay for employees’ health care.

For-profit San Francisco employers with 20 or more employees and nonprofit employers with 50 or more employees must pay a minimum amount in health benefits for each hour the employee has worked. An employer can use the payment to pay for health coverage, fund a health account, or reimburse an employee for medical expenses.

Ed Fensholt, a compliance services lawyers at Lockton Benefits Group, a unit of Lockton Companies L.L.C., Kansas City, Mo., has written about the changes in a compliance alert.

Fensholt, who helped Lockton develop a guide to the San Francisco health benefits mandate, notes that some employers have been complying with the mandate by contributing to HRAs — health accounts controlled by the employer.

The laws and regulations governing HRAs let employees can roll HRA purchasing value over from year to year, but the employer continues to own the purchasing power in the account and can take it back when employees leave.

When an employee at a San Francisco employer using the HRA compliance strategy has left, the employer has exercised its right recapture the employees’ HRA contributions, Fensholt says.

San Francisco now has changed the health benefits mandate to make using HRAs to meet the requirements more difficult, and it has added new administrative rules that appear to make using the HRA strategy less appealing, Fensholt says.

Some San Francisco employers have imposed surcharges on customers to pay for the mandated health benefits, and the city also has added new reporting requirements on employers that impose health mandate surcharges, Fensholt says.

Now, an employer can get credit for meeting health benefits mandate for HRA contributions only if the employer makes the HRA contributions irrevocably, to a third party, such as a trustee, on behalf of the employee, or if the employer uses another method described in amendments to the ordinance.

The contributions must be available to reimburse “all IRS-eligible medical expenses, the employee must have at least 90 days to submit a claim for reimbursement following loss of eligibility for the HRA, and the contributions must remain available to the employee for reimbursement of any qualifying expense for a minimum of 24 months after the date of the contribution.

If an employee leaves, the funds “need only be available for 90 days, but the employer must provide the employee a written summary of his or her HRA balance within three days after termination,” Fensholt says.

An employee also must receive a written summary of each contribution within 15 days of the date of the contribution, and any any reimbursement account funds available at the end of 2011 must roll over to 2012.

There are also other new administrative requirements and higher penalties for non-compliance, Fensholt says.

“We suspect few employers will want to deal with the new administrative obligations related to HRA contributions,” Fensholt says.

The new requirements could be struck down by a court, but few of the affected employers will have the means to take the city to court, Fensholt says.